Good day, ladies and gentlemen, and welcome to the AxoGen, Inc. Reports First Quarter Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Ed Joyce. Sir, the floor is yours.

Thank you, Dagmar, and good afternoon, everyone. Joining me on today's call is Karen Zaderej, AxoGen's Chairman, Chief Executive Officer and President; Erick DeVinney, Vice President of Peripheral Nerve Science and Clinical Innovation; and Pete Mariani, Executive Vice President and Chief Financial Officer. Karen will discuss the quarter and our outlook for the year, Erick will discuss the RECON study and top line results, and Pete will provide an analysis of our financial performance, followed by closing remarks from Karen, and a question-and-answer Session. Today's call is being broadcast live via webcast, which is available on the Investors section of the AxoGen website. Within an hour following the end of the live call, a replay will be available on the Investor section of the company's website at www@axogeninc.com. Before we get started, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Forms 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include without limitation, statements related to the expected impact of COVID-19 and hospital staffing on our business, statements regarding our growth, our financial guidance, product development, product potential, expected clinical enrollment timing and outcomes, regulatory processes and approval, APC renovation timing and expense, financial performance, sales growth, product adoption, market awareness of our products, data validation, our assessment of internal controls or financial reporting, our visibility ads and sponsorship of conferences and educational events, global business disruptions caused by Russia's invasion of Ukraine and related sanctions and other matters not within our control. And with that, I'd like to turn the call over to Karen. Karen?

Thank you, Ed, and good afternoon, everyone. It's a pleasure to be talking to you today. I am pleased with our first quarter revenue of $31 million, matching last year's first quarter and an increase of 6%, excluding the impact of revenue from Avive Soft Tissue Membrane. We are also thrilled to have announced today that our RECON study successfully achieved its primary endpoint, which is a critical milestone towards transitioning Avance Nerve Graft to a licensed biologic and further supports the expanded adoption of Avance. Before providing comments on our operational results, we'd like to discuss the RECON top line data readout. The study achieved its primary endpoint of non-inferiority as compared to conduits. The safety profile of the study was consistent with previously published data, and we remain on track to complete the work necessary to submit our BLA in the second half of 2023. I would like to remind you that this study was the culmination of many years of effort and one of the most significant undertakings in our company's history. We are extremely pleased with today's outcome, which is consistent with the results we have seen in our registry data collected over the last decade. Achieving RECON's top line endpoint provides clinical confirmation of the performance of Avance Nerve Graft. The results of this study provide level 1 clinical evidence, the highest quality possible, which significantly bolsters our growing arsenal of data and peer-reviewed papers and provides robust data to support surgeon adoption of Avance as the optimal treatment option for many patients with peripheral nerve injuries. We believe the current standard of treatment using autograft is suboptimal and can lead to complications with a second surgical site. Use of Avance Nerve Graft has an established track record and continues to gain traction with surgeons as they adopt the AxoGen algorithm. We still have much work to be done prior to filing the actual BLA submission, which we anticipate will occur in the second half of 2023. We're in the process of compiling the appropriate documentation on this clinical study, our facilities, operations, quality systems and much more, all of which are required for a successful application. I'd like to now turn the call over to Erick DeVinney, our VP of Peripheral Nerve Science and Clinical Innovation, who will go over the RECON trial and top line results. Erick has been with AxoGen for 15 years and has been instrumental in the design and execution of the RECON study, and we're happy to have him on the call today. Erick?

Thank you, Karen. It's a pleasure to be here. I'd like to begin by providing some background on Avance Nerve Graft and the RECON study. Launched in 2007, there are over 50,000 Avance Nerve Grafts that have been implanted to date. Avance had a long successful and safe track record, excuse me. Launched in 2007 with over 50,000 Avance Nerve Graft implants, Avance has had a long and successful track record on the market. Originally, it was classified and regulated as a 361 tissue product, which fell under the FDA human cells, tissues and tissue-based products. In 2010, AxoGen and FDA aligned on transitioning events from a 361 tissue to a 351 biologic. As part of this transition plan, FDA granted AxoGen an enforcement discretion to allow us to continue to market and distribute Avance, while working towards our BLA submission. Subsequent to our transition plan, FDA released a guidance document on regulatory considerations for tissue products that included classification of peripheral nerve as a nonstructural biologic tissue. In support of our BLA, we underwent a special protocol assessment to gain agreement with the FDA on the robustness of the study design and the analysis plan. Those efforts and discussions led to the creation of the RECON study. RECON is a Phase III pivotal clinical trial designed to compare safety and efficacy of Avance Nerve Graft and conduits for digital nerve injuries in the hand. The study is prospective, randomized, subject and evaluator minded and assessed recovery outcomes in nerve discontinuities between 5 and 25 millimeters in length across the 12-month period. The study was designed to look at sensory outcomes for Avance with the primary endpoint being a test for noninferiority to conduits. Additional analyses were performed to test for superiority between the groups. The primary endpoint measure of…

Thanks, Erick. We cannot be more excited about this huge achievement, and I want to thank all of our participating subjects, clinical sites and investigators and all of our employees who have contributed to this accomplishment. Returning to our first quarter results, we were pleased that our revenue increased each month of the quarter and across each of our nerve repair applications of extremities -- extremities trauma, breast, pain and OMF. With COVID-related hospitalizations peaking early in the quarter and then declining, surgical schedules gradually improved across the quarter despite ongoing hospital staffing challenges. For example, after suspending breast reconstruction procedures for several weeks, most of our breast customers had restarted reconstruction procedures by the end of the quarter, providing the opportunity to begin catching up on a growing backlog of patients. We anticipate hospital staffing issues will improve over the course of the year and are optimistic about our growth prospects. Our commercial focus remains on driving deeper penetration into customer accounts while also continuing to add new accounts. We continue to expand surgeon adoption of the AxoGen nerve repair algorithm across our accounts, leveraging the numerous clinical publications featuring our products and now supported by the positive top line results of our RECON trial to lead discussions with surgeons. As of the end of the quarter, we had 288 core accounts and 926 active accounts, representing an increase of 5% and 1% versus prior year's first quarter, respectively. As a reminder, active accounts are those that [indiscernible] 6 times in the last 12 months and may still be in the early stages of adoption. Active accounts continue to represent about 85% of our total revenue, with the top 10% contributing about 35% of revenue. Core accounts represent more penetrated accounts, defined as those that have had greater than…

Thank you, Karen. First quarter revenue was $31 million, matching the first quarter of 2021 and an increase of 6%, excluding the $1.7 million of Avive revenue in the first quarter of 2021. First quarter revenue was negatively impacted by the Omicron variant and related hospital staffing challenges, particularly in the first half of the quarter. Revenue was negatively impacted by a 4% decrease in unit volume, which is offset by changes in price and product mix. And if you exclude the impact of Avive revenue in the prior year, units increased by 3% and price and mix combined for a similar 3% impact. Gross profit for the first quarter was $25.5 million compared to $25.9 million in Q1 of '21. Gross margin was 82.1% for the quarter compared to 83.3% in the prior year. Total operating expense in the first quarter increased 15% to $36.8 million compared to $32.1 million in the prior year. The increase in total operating expenses was primarily due to increased sales and project-related headcount and the return of in-person sales team and physician meetings and education events, travel and increased professional services spending. Sales and marketing expense in the first quarter increased 16% to $20.9 million compared to $18 million in the prior year. The increase was primarily due to marketing development programs, compensation-related and travel-related expenses from increased sales activity with greater hospital access. As a percentage of total revenue, sales and marketing expenses increased to 67% for the 3 months ended March 31st compared to 58% in the prior year. Research and development expenses increased 9% to $6.3 million compared to $5.7 million in the prior year. The increase in R&D expenses reflects increased spending in specific programs, including our efforts related to the BLA for Avance Nerve Graft and a next-generation…

[Operator Instructions] Our first question comes from Danielle Antalffy.

Guys, this is Erin on for Danielle. Thanks for taking our questions and congrats on a great quarter and the RECON results. I think just starting off for us with the RECON, I was hoping if you guys could just frame for us the potential impact this will have on revenue and growth. Where do you expect this study to have the most meaningful impact? Would it be within kind of existing surgeons or potentially help penetrate new surgeons and accounts? Thank you so much.

Sure. Thank you. Yes, we're very happy to have the results and complete this study. It's an exciting milestone for us. So we'll break out the champagne in a little bit. But in terms of the impact, I think I'll put it -- we've talked about in the past about early adopters and middle adopters. And early adopters are usually those surgeons who are willing to try things for themselves, build their own databases and were certainly the early adopters of the AxoGen algorithm. And in many cases are the faculty that teach our nerve programs today. But middle adopters tend to look for more confidence and security of data and that the experts in front of them have already evaluated that data. And so to complete a study like this with the rigor of a Phase III study with the independence of a Phase III study and level 1 evidence I think will bring middle adopters who may have been sitting on the sidelines to begin to think about changing their algorithm. Now I do want to caution, this is not like a pharmaceutical where everybody changes what their prescribing patterns, and it changes all at once. I still believe these middle adopters will trial. So they'll do a few implants, they'll wait and see their outcomes. They'll see how that progresses in this first segment that they adopt and they'll continue to adopt in this stairstep pattern. But it will help us as we continue to drive penetration in our core -- our active and core accounts to bring in those, not only the second and third surgeon, but many of the other surgeons in those same centers.

Okay, great. Thanks so much. And then I guess just turning to the quarter and revenue, if you guys could just talk sort of about the trend that you've seen in the quarter, how things are looking into April, just maybe by the different areas like trauma, breast, pain? And then just how we should be thinking about the cadence for the rest of the year?

Sure. Well, I'll start, and Pete will chime in as we sit and talk about the rest of the year. But the quarter definitely had challenges. January was very disruptive to procedures, actually in all of our segments. In fact, if I look at our more elective procedures, we had a near shutdown of those procedures at points in the month of January. That's because these elective procedures like breast and oral maxillofacial are very -- both elective, but also resource intensive. They're inpatient procedures, they're long OR procedures, and we saw a significant disruption of those. Now I'm happy to say that as the quarter progressed, obviously COVID hospitalizations went to a much, much more manageable levels, but hospitals are also beginning to manage their staffing challenges and were able to open up even these inpatient procedures as well as bring back procedures like some of the trauma procedures that sort of dispersed into community and ambulatory surgery centers to try and allow some of those to even occur, where hospitals didn't have the capacity or the capability to do it. So we saw things improving each month in the quarter and each of our segments got better as we went through the quarter. And again, as we ended the quarter, the breast reconstruction sites were up and starting to do surgery again, the oral maxillofacial program was back to doing surgery again, and we were seeing a rebound in the surgical treatment of pain as well as trauma. And Pete, do you want to talk about going forward?

Yes, no, we're happy with the way things came out for the quarter. We had in our guidance, at year-end we suggested that we thought first half growth would look like low to mid-single digits in the first half and then a return to more normalized growth in the second half of the year. We achieved 6% growth here in the first quarter. We would continue to take that same measured approach here over the second quarter. And we'll just -- we're off to a good start. We've got lots of optimism about where the business is, but continue to be measured here in the near term and then a return to more normalized growth in the back half.

Our next question comes from Frank Pinal.

Hi, guys, congrats on the -- on the compelling data on RECON and nice quarter. I hope you're all do well. Just 2 quick ones for me. As a follow-up to the RECON question, I'm wondering if there's an opportunity with the headline data here, early on in the year to sort of use that as part of your marketing plan or if there's an opportunity there to bolster sales for the back half of the year? I guess that's one. And then second -- I'll just ask my second now. And Pete, I think you gave some guidance on the cadence of margins for the balance of the year. The call accidentally dropped on me, if you can restate that, that would be extremely helpful.

Well, so I'll start with the RECON data. We're very excited about it. In fact, we have a little bit later tonight the rollout with the broader investigators, where the lead investigators will be presenting the data and reviewing it with them, and I think it will create some positive scientific discussion that will happen amongst the investigators and amongst their peers. We fully expect that this will be data that will be compelling and interesting. While I can't guarantee it because it's not within our control. I expect it will be discussed and presented at some of the upcoming hand conferences later this year. Again, given the rigor and level of evidence, it's truly unique in this area. And so I know that surgeons are excited to talk about it and hopefully it will be something that will be a major part of their agenda. And then as the paper comes out, which will certainly follow all of this, then the reps will be able to provide that as additional scientific evidence in their discussions. So absolutely, it's something we plan to talk about. We plan to continue to build on. But of course, we're going to do it in the rigors of good clinical evidence.

Yes, and Frank, what I mentioned was that we just reiterated our guidance that margins will continue to be above 80%.

Our next question comes from Ross Osborn.

Congrats on the quarter. So I guess sticking with gross margin quickly, it was obviously still above 80%, but are there any headwinds or tailwinds you would highlight that occurred during the quarter that maybe we should be thinking about through the balance of the year?

No, look, I think we've had -- our margins have been sort of in the low 80s consistently and they've moved around up from quarter-to-quarter just with changes in the pace of manufacturing or processing throughput, just normal ups and downs of the manufacturing process. We're comfortable with margins continuing to be in historical ranges.

Okay, great. And then one more on the sales and marketing side of things. Would you just remind us of direct-to-patient educational campaigns you guys have ongoing. And then as a follow-up, could you share any quantitative measures on your resonation or RETHINK PAIN, maybe a website hits? Or have you seen any changes in traffic as the year started.

So first, the outreach that we have, the education activities, we look at educating both consumers and surgeons. So on the surgeon side, we have always educated 75% of the hand and microsurgery fellows. Of course, during the pandemic, we had to go to virtual education, which was good, but it's never as good as these hands-on programs. In the fall of last year, we were able to return back to in-person education, both for fellows. We also have a separate program, a little different targeting on the level of information provided to attending. In fact, I just came from one of these programs in Atlanta and surgeons are frankly just super excited to get back together and talk about an important topic like nerve repair. We see very good adoption -- well, that's -- we see very good initial trial and then progressed adoption from the surgeons who attend these programs, but it really starts with an education. They're very not promotional. They are very much on the techniques and principles of nerve repair. And when you go through that, you step back and it's logical and clear why we've developed the algorithm and portfolio that we have, is that it answers the needs that surgeons have as they go into these different types of nerve injuries. And so we find that a very helpful and impactful process to help surgeons think about what they're doing, be confident in what they're doing and expand their work. And of course, RECON will help to continue to support that. On the patient side, much of what we try and do is actually just increase awareness. Patients don't think anything about nerve and they don't know that nerves are a cause of either a problem or a quality of life impact that…

[Operator Instructions] Our next question comes from Dave Turkaly.

Congrats, and I want to congratulate Ed for coordinating the first quarter results with the top line release, impressive. Karen, can you remind us -- I may have missed this, but how many Avance grafts and conduits or treatment in total were in the RECON study.

So the enrollment with 220 subjects.

And so that's the number of nerve repairs that they were as well?

Yes, so we evaluated only 1 nerve injury per patient. Some patients might have had more than 1 nerve injury, but the protocol was written to address that. So no patient is included in the study twice. They're only in the study once.

Got it. And when you look at the algorithms that surgeons use the conduit, the collagen tubes and the like, are they indicated specifically for certain length of gap, or I mean, where are they most commonly used?

Yes, great question. So historically, conduits have an indication of up to 30 millimeters, and I say that there's some variation with some brands, but they're typically in the up to 30 millimeters. That is actually still the exam question for surgeons as they come out of their program at the fellow and move into being an attending. One of the questions is, what is the appropriate gap link for our conduit and it still says up to 30 millimeters. We have said from even the prior data that, that was generous to a fault to where they're shown to be effective. And that was the point of this study to help be able to demonstrate that; A, Avance is an appropriate treatment for nerve repair and I think we've clearly demonstrated that with these results. But to also demonstrate that there is the conduit performance decreases as the length increases, and that's what we saw in the study as well.

Got it. And I guess, clearly you wanted to hit the primary end point. And then when you look at some of the other data, I guess I'd just love your thoughts on -- I mean, we all know they're good, but the return of function, the 12-millimeter, the time to recovery of the 3 months and the 10 and the pain delta, which was the most surprising to you or which do you think is the most powerful in terms of secondary observations? Well, I think those are 2 separate things and I'll look at my friend, Erick, to see if he has any additional comments. But I guess we fully believe and expected that Avance would be superior in these longer lengths. And we were -- we used to see we were able to demonstrate that. I think the thing that was probably more surprising and it's just a finding that helps us solidify things that I've heard surgeons talk about, they give us data within the safety side of looking at the persistent pain and the difference between conduits and Avance. And these are patients that the pain is not letting up for them. It's unresolved, may very likely be something that will result in a revision or this will be an impact on their quality of life going forward. And this is a hard thing to study in something like our registry because it needs a very rigorous and consistent way of asking about the pain and following up on the pain. And then the registry study is just hard to be sure that you have that. So while anecdotally I've heard surgeons talk about this, we are pleased to be able to see this type of data and it's something we'll dig into a little bit more because we really think it's impactful for surgeons to understand that. And then interestingly, the returning normal sensation up to 3 months earlier. I think there's a good scientific explanation as to why it does that, but we have not seen that in some of our previous results. Again, it takes a study of this type of rigor and structure to be able to pick up a trend like that. And 3 months is -- that's pretty meaningful to be able to get back to normal sensation that much earlier. No, I agree. And maybe if I could slip one last one in for your colleague. The pain one, I mean it may be too early to answer this, but is there any sort of reason or -- and obviously we know what Avance is versus what a tube collagen is, but why that would be the case, like initial thoughts on why that would be so?

Yes, when you look at the mechanism of how conduit support regeneration, not matter what's on the inside, its reliant upon a vibrant matrix forming and filling that tubular structure. And that doesn't have the organization and the alignment that you see in something like a nerve allograft. Active laminin scaffold in an organization inside Avance Nerve Graft that provides the structure to support regeneration across versus the disorganized regeneration you see inside a tube. And that disorganized regeneration if it's incomplete or if it's suboptimal, disorganized regeneration results in essentially a neuroma and neuroma like pain. And if that becomes symptomatic, you detect that, and that's an unfortunate impact on the patient's quality of life. So if you look at how these products work and that -- the importance of that active laminin scaffolding that makes a huge difference in how the nerves regenerate. The disorganized regeneration of these manufactured tubes leads to the -- potentially leads to this greater risk of seeing this type of chronic pain.

Okay, that was our final question. I'd like to turn the floor back over to Karen Zaderej for closing remarks.

Thank you. Well, I believe we're off to a solid start this year, and we could not be more excited about our RECON achievement announced today. I am proud of all our members of team AxoGen, who remain committed to our mission of improving nerve function and quality of life for patients with peripheral nerve injuries. I want to thank everyone for joining us on today's call, and we look forward to speaking with you in the near future.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.